Navigating unchartered waters

Channel does a story on rising grain costs and biofuels demand. At the end of the piece, the anchorman says, “I guess that’s good news for my cousin’s dairy out in Nebraska,” and the reporter responds that she would like to talk to that cousin.

Very insightful on the reporter’s part, because rising grain costs may or may not be good news for the cousin’s dairy. If the cousin has to buy his own feed, higher grain costs are not good news.

Long-held assumptions are no longer valid. Many of the navigational tools and compass points that once provided guidance no longer exist.

In this environment, you will be challenged to find new ways of doing things.

A new situation

What, you ask, is so unprecedented about today’s situation? We have had high feed prices in the past, due to drought or other weather calamities. What’s this business about “navigating uncharted waters?” We have seen it before.

What makes this situation so unprecedented is the potentially long-range aspect, far surpassing any temporary weather problems.

As our country seeks new forms of energy — to reduce our dependence on foreign oil — corn and other crops will be utilized for biofuels, creating a pinch on the amount available for livestock feed.

In the past, there have been high corn prices brought on by low yields or drought, points out Mike Hutjens, dairy specialist at the University of Illinois. But higher corn prices brought on by biofuels production do not look like a “one-year, flash-in-the-pan” kind of thing, he says. They look like they are going to continue, he adds.

Hutjens says he only recalls a couple of times in his career where the milk-feed ratio (indicating relative profitability based on milk prices and feed prices) dropped well below 3.0 because of higher feed prices. Almost always, he says, it’s been because of low milk prices.

In February, the milk-feed ratio dropped to 2.33, well below the comfort level of 3.0, and higher feed costs were mainly responsible.

On Feb. 28, corn futures hit a record high on the Chicago Board of Trade. The nearby corn contact traded up to $5.57, which erased the previous record of $5.55 set in July 1996. Soybean futures reached their record in January. Both commodities continued to rise through early March, and no one knows how much higher they might go — it’s uncharted territory at this point.

Much of this is brought on by the new global economy. Growing affluence in China, India and other countries has put them in direct competition with the U.S. for food and energy.

Rethink things

Dairy producers will have to re-think some things as a result. For instance, they may rely on high-quality forage to replace some of the concentrate in their rations.

“We might be able to carry rations that are 70, 75, 80 percent forage, with strategic use of other feeds to complement those forages,” Hutjens says. Under that scenario, high-quality forage will be more important than ever — for instance, corn silage with a neutral-detergent-fiber digestibility above 60.

Perhaps more can be done with highly digestible fiber sources like beet pulp, soy hulls and distillers grains as a partial replacement for corn. (For specific strategies, please see “Treasure Hunt” on page 26 of this month’s issue.)

“If the price pressure continues, we may have to look at a different strategy in terms of producing milk,” Hutjens adds. Some producers may decide that they can sacrifice some milk production if it means not having to pay higher and higher feed prices. Rather than striving for a 30,000-pound annual herd average, they may be able to optimize their finances at a lower production figure. The intensive-grazing people have already adopted this business model — lower input cost, with the probability of lower milk production as a result.

Manage risk

It’s all about learning to manage risk.

Marvin Hoekema, owner of Dairy Decisions Consulting in Gainesville, Fla., has emphasized these strategies to his clients:

Try to gain as much control over your feed supply as possible. With high commodity prices, it becomes more valuable to raise your own forages and grain than to rely on someone else to do it, Hoekema says. In many cases, it is better to retain control over the land rather than renting it out. And, consider buying or renting more cropland if your balance sheet and debt service will support it, he adds.

Pay more attention to feed efficiency. “Now is the time to implement a system to follow and track feed conversion and feed shrink on a real-time basis,” Hoekema says. Computer-software packages like TMR Tracker and Feed Watch allow you to do that.

Follow the commodity markets and look for buying opportunities. Buy on the “breaks,” Hoekema advises. For instance, on March 7, the futures market price for July soybean meal was $353 a ton, down more than $40 from what it had been earlier in the week. It was a significant market correction or “break,” which signaled a buying opportunity. Price breaks allow you to get into the market before prices go back up again. But Hoekema suggests having a “covered” strategy in place, giving you leverage either way the market goes. For instance, with a multi-legged strategy, such as buying put options in combination with a forward contract, you insure yourself against being locked into high commodity prices if the market should continue downward.

Patrick Johnston, owner of Rocking S Dairy north of Modesto, Calif., has done exactly that. Recently, he bought corn puts for $240 a ton, which gave him the right, but not the obligation, to sell corn at an agreed-upon price. If corn rises to $300 a ton, he can let the puts expire worthless. If corn drops to $190 a ton, he can sell the puts and capture $50 a ton ($240 minus $190). Meanwhile, he has forward-contracted steam-rolled corn at $253 a ton through October to protect against possible price increases.

Adopt a nutrient mentality

Be flexible about the ration ingredients you use, aslong as those ingredients deliver the bottom-line nutrition you need.

For example, a 500-cow farm in upstate New York has switched back and forth between soybean meal and canola meal, depending on the relative affordability of those feedstuffs. In the spring of 2007, when soybean meal got really expensive, the dairy switched to canola meal as its main degradable protein source, says Jay Giesy, dairy specialist with Cargill Animal Nutrition. Then, in early April this year, the farm switched back to soybean meal again.

The farm owner was pretty open-minded about making the switch, Giesy says. It’s just a matter of putting the cost of the feedstuffs in perspective and formulating the rations to deliver nutrients.

When feeding a cow, you are basically feeding rumen microorganisms, Giesy points out. The “bugs” need protein, sugars and starches. “They don’t know if it’s soybean meal (that goes into the ration), they don’t know if it’s canola meal — they just need the nutrients,” he adds.

Don’t get fixated on a certain ingredient when there may be other feeds that deliver similar nutrition at a cheaper cost. “The key is knowing the nutrient content of available ingredients and matching them with cow requirements,” Giesy says.

The old adage, “necessity is the mother of invention,” has never been truer than it is today.

Ethanol drives demand

Crude oil prices drive ethanol production, which, in turn, drives the corn price, says Amani Elobeid, analyst with the Center for Agricultural and Rural Development at Iowa State University. If the crude oil price remains strong, ethanol will continue to grow and displace grain for animal feed, she told an audience at the recent Southwest Nutrition & Management Conference in Tempe, Ariz.

During the 2006/2007 marketing year, which began in September 2006, 2.1 billion bushels of corn were used in produce fuel ethanol, she said. That could go up as much as 1 billion bushels in the current marketing year.

The 51-cent-per-gallon ethanol-blenders’ tax credit is set to expire next year. No one knows yet if it will be renewed. But government policy has generally been favorable toward the development of alternative fuels.